Risk attitudes in a social environment

Abstract

Risk Attitudes in a Social ContextBy extending existing models of social preferences in a risk-free environment, this chapter develops models that capture social preferences when payoffs are risky.Each of these models predicts not only that utility levels are influenced by payoffs and risks faced by others, but also that an individual's choices between lotteries depend on the payoffs and risks his environment faces.In order to investigate how payoffs of others influence risk attitudes, this chapter introduces a new experimental methodology.The feasibility of the methodology is demonstrated in an experiment.Subjects are faced with two types of questions.In the first type of question, subjects choose between lotteries for themselves, given the lottery that other subjects receive.By varying the lottery others receive, we test whether the payoffs and risks others face have an impact on an individual's risk attitude.In the second type of question, subjects choose between random allocation rules for the other subjects, while their own lottery is fixed.Thus, our subjects never simultaneously influence their own payoff and the payoff of others.In particular, in the first type of question, choices are not confounded by intentions and social pressure.The results of the experiment are mixed.The influence of others' lotteries on subjects' choices is unexpectedly weak, in comparison to the existing literature.The results of the second type of question are striking, though.Subjects have a clear preference for one allocation rule over the other, suggesting an unexplored type of decision aversion, which can be captured by only one of the models we introduce, namely the expected social rank utility model.

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